#Break even point formula service plus#

The contribution margin is $100 ($125 sales - $25 variable) and the contribution margin ratio is 80% ($100 contribution margin /$125 sales). Management would express each variable cost on a per passenger basis. Variable costs include snacks and beverages provided to passengers, baggage handling costs, and the cost of the additional fuel required to fly the plane with passengers to its destination. The variable costs vary directly with the number of passengers. Fixed costs include the fuel required to fly the plane and crew (with no passengers) to its destination depreciation on the plane used on the flight and salaries of required crew members, gate attendants, and maintenance and refueling personnel. The fixed costs of Flight 529 are the same regardless of the number of seats filled. To solve this problem, management must identify and separate costs into fixed and variable categories. The management of a major airline wishes to know how many seats must be sold on Flight 529 to make $8,000 in profit. If you think about it, it IS the same formula because at break even our target income is ZERO. These are the same formulas we used for break even analysis but this time we have added target income.

The good news is you have already learned the basic formula, we are just changing it slightly. You can also use this same type of analysis to determine how many sales units or sales dollars you would need to make a specific profit (very helpful!). This means that sales volume could drop by 16.67 percent before the company would incur a loss. Using the data just presented, we compute the margin of safety rate is $20,000 / 120,000 = 16.67 % Sometimes people express the margin of safety as a percentage, called the margin of safety rate or just margin of safety percentage. Margin of safety = Current sales – Break even sales The margin of safety is $ 20,000, computed as follows: For example, assume Video Productions currently has sales of $120,000 and its break-even sales are $ 100,000. The margin of safety is the amount by which sales can decrease before the company incurs a loss. If a company's current sales are more than its break-even point, it has a margin of safety equal to current sales minus break-even sales.

#Break even point formula service plus#

At this level of sales, fixed costs plus variable costs equal sales revenue, as shown here: The break-even volume of sales is $ 100,000 (can also be calculated as break even point in units 5,000 units x sales price $ 20 per unit). Using this contribution margin ratio, we calculate Video Production's break-even point in sales dollars as: That is, for each dollar of sales, there is a $ 0.40 left over after variable costs to contribute to covering fixed costs and generating net income. Or, referring to the income statement in which Video Productions had a total contribution margin of $48,000 on revenues of $ 120,000, we compute the contribution margin ratio as contribution margin $48,000 / Revenues $120,000 = 0.40 or 40%. Video Production's contribution margin ratio is: To calculate this ratio, divide the contribution margin per unit by the selling price per unit, or total contribution margin by total revenues. The contribution margin ratio expresses the contribution margin as a percentage of sales. The formula to compute the break-even point in sales dollars looks a lot like the formula to compute the break-even in units, except we divide fixed costs by the contribution margin ratio instead of the contribution margin per unit. For a company such as GM that makes Cadillacs and certain small components, it makes no sense to think of a break-even point in units. Video Productions has net income at volumes greater than 5,000, but it has losses at volumes less than 5,000 units.īreak-even in sales dollars Companies frequently think of volume in sales dollars instead of units. Look at the cost-volume-profit chart and note that the revenue and total cost lines cross at 5,000 units-the break-even point. We can prove that to be true by computing the revenue and total costs at a volume of 5,000 units. The result tells us that Video Productions breaks even at a volume of 5,000 units per month.